Rates Absa expects housing market to slow further
JOHANNESBURG (June 12) - The Reserve Banks Monetary Policy Committee (MPC) today hiked the key policy rate, the repo rate, by 50 basis points to 12%, prompting banks to raise their prime and mortgage rates to 15,5%.
Interest rates have been hiked by a cumulative 500 basis points since
Absa expects the upward pressure on inflation to continue in the near term, especially after domestic fuel prices were raised to record highs last week. If the food and fuel price components are excluded, CPIX inflation continued to rise, to a level of 6,1% in April 2008, which points to rising secondary inflationary effects in the economy.
In view of these developments and Reserve Bank expectations of CPIX inflation to reach the 6% level in only 2010, the MPC hiked interest rates once again, despite clear indications that consumer demand and growth in credit extension are declining.
With inflation expected to remain under upward pressure in coming months, Absa there is a risk of further rate hikes later in 2008.
On the property front, nominal year-on-year house price growth has slowed down markedly from 15,4% in mid-2007 to 4,3% in May this year. The significantly lower house price growth is believed to be the result of the upward trend in interest rates, declining growth in real household disposable income up end-2007, well as the impact of the National Credit Act, dampening housing demand.
The debt servicing cost of households has increased from 7,2% of disposable income in the first quarter of 2006 when the prime interest rate was at 10,5% and the household debt ratio was 68,8%, to about 11,8% in the first quarter of 2008, with the prime rate averaging 15,04% and the debt ratio at 78,2% in the quarter. In view of the latest interest rate hike, and prospects of further rate hikes later in the year, Absa says this ratio is set to rise further towards the end of 2008.
The affordability of housing, especially for first-time buyers in the low and middle-income categories, will be further adversely influenced by the latest rate hike.
Consumers spending power has been severely eroded by higher food and fuel prices over the past number of months. In addition to this, the cumulative rise of 500 basis points in interest rates since mid-2006 has caused the average monthly repayment on a mortgage loan to have risen by 35,6%.
Against this background, levels of activity and price growth in the residential property market are expected to slow down further in the second half of the year and into 2009.
In real terms, Absa forecasts house prices to drop for the first time
this year since 1999. Mortgage advances growth, currently at 21,9% year-on-year
after declining from almost 31% in October 2006, is forecast to continue
to slow down towards the end of the year and into 2009 on the back of
the interest rate cycle, the impact of the National Credit Act, and
a slowing housing market.
Article by: Rodney Hayter - www.rodneyhayter.com